The History of Credit Cards and Consumer Debt

The History of Credit Cards and Consumer Debt

Where did this modern epidemic of what I call the “Plastic Plague” come from? Most of us have been taught that buying things on credit is not only normal, but also the smartest way to purchase. We think we have to pay for everything with a credit card so we can rack up as many rewards points as possible and improve our credit score. We have been taught to maintain a mortgage even if we have enough money to pay it off so we can deduct the interest off of our taxes. Lending institutions have done a great job convincing us that what is in their best interest is also in our best interest.

What is the origin of our current society’s attitudes towards debt? What did we do before car loans existed? Did you know that Henry Ford believed as a matter of principle that no one should ever buy a car on credit? He invented major breakthroughs in production efficiency to drive costs down so his automobiles would be more affordable to the middle class, but he still expected everyone to pay cash.

No other manufacturer could quite compete with the very inexpensive Model T Ford until 1919 when General Motors formed its own lending institution, General Motors Acceptance Corporation (GMAC). This innovation allowed average people to buy GM’s higher-priced, more luxurious automobiles with lower payments over time. By 1926 three-fourths of all car sales in America were financed.[i]

Sticking to his principles, Henry Ford fought this movement as long as possible, and thus suffered a dramatic decline in sales. In 1927 Ford Motor Company was finally forced to set up its own credit arm in order to compete.[ii]

The U.S. Department of Housing and Urban Development states that before the Federal Housing Administration (FHA) was created in 1934, “mortgage loan terms were limited to 50 percent of the property’s market value, with a repayment schedule spread over three to five years and ending with a balloon payment.”  This new government program was created to stimulate the sluggish housing industry during the Great Depression by making home purchases feel more affordable. It dramatically reduced the amount required for down payment and allowed for lower monthly payments stretched out over much longer periods, such as 20 or 30 years, which we now think of as the norm.[iii]

Can you believe that credit cards did not even exist until the 1950s? That is only about 60 years ago at the time of this writing.[iv] How did people survive for thousands of years before credit cards were introduced? Are they really as essential as we think they are?

Easy access to credit has allowed us to easily spend more than we make without realizing it until it is too late. Once we have tasted the sweet savor of getting what we want now without having to pay for it until later, it is very difficult to go back to paying cash for everything. That is why GM’s idea exploded so rapidly, and that is why our society is so addicted to debt.

However, there can be severe consequences for being allured by tantalizing opportunities to buy now and pay later. Although it may feel good in the beginning, most of us are oblivious to the true costs of going into debt.

 

[i] Kim Kenney, “Cars in the 1920s,” American History @Suite 101, 15 January 2009, <http://kim-kenney.suite101.com/cars-in-the-1920s-a90169> (2 May 2012).

[ii] Steven Smith, “Culture of Debt Driven by GM,” Marketplace: The Borrowers, 9 March 2009, <http://www.marketplace.org/topics/business/borrowers/culture-debt-driven-gm> (2 May 2012).

[iii] “The History of FHA,” U.S. Department of Housing and Urban Development: The Federal Housing Administration (FHA), <http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/fhahistory> (3 May 2012).

[iv] Ben Woolsey and Emily Starbuck Gerson, “The History of Credit Cards,” <http://www.creditcards.com/credit-card-news/credit-cards-history-1264.php>  (2 May 2012).

 

Adam Dawson, CFP® is a Principal at Capstone Capital and the author of Timeless Principles of Financial Security.

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